Archive for the ‘Regulatory & SEC issues’ Category

Schoolmarm & the three Rs

September 14, 2009

FederalHall-GovtPhotoPresident Obama commemorated today’s anniversary of the collapse of Lehman Brothers and the ensuing financial panic by going to the Wall Street playground and delivering a schoolmarm’s lecture to the boys who’ve been acting up. (News story here, text of speech here.)

Like many a grammar school teacher, Mr. O lectured all the kids without differentiating much between those who actually misbehaved and those who followed the rules. For example, the president said:

I want everybody here to hear my words: We will not go back to the days of reckless behavior and unchecked excess that was at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses. Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall.

The president retold the brief history of the financial crisis since September ’08. Not delving much into root causes or the cyclical nature of markets, he focused on the misdeeds of Wall Street. He reminded us (twice) that the crisis was already raging when his administration walked in the door. In this lecture, he made it clear that the schoolboys have failed to learn the three R’s.

The first “R” word is risk. And risk, we gathered from the president, is bad. At least, it’s bad when Wall Street fails to properly anticipate or control it – he spoke of risky loans, risky behavior, reckless risk. These may be seen more easily in hindsight, perhaps, but the president definitely wants financial markets to take less risk.

The president also invoked responsibility. We heard the second “R” word 20 times in its various forms. Mostly, he chastised the giants of the financial world for not acting responsibly … and urged them to grow up and embrace responsibility.

Most of all, Mr. O lectured on regulation. He said the financial crisis came about, essentially, because of a lack of adequate regulation from Washington. And he promised the errant schoolboys more regulation – much more – and by the end of this year if he and Vice Principal Barney Frank have anything to say about it.

Don’t get me wrong. I’m not defending executives on Wall Street, or elsewhere, who failed to disclose risks to investors, dodged responsibility for their actions, or found ways to exploit loopholes in regulation. The wreckage of shareholder value is producing recriminations – and malefactors deserve what they get, you might say.

Mr. O offered one admonition to corporate leaders that I think is correct:

The reforms I’ve laid out will pass and these changes will become law. But one of the most important ways to rebuild the system stronger than it was before is to rebuild trust stronger than before — and you don’t have to wait for a new law to do that.  You don’t have to wait to use plain language in your dealings with consumers.  You don’t have to wait for legislation to put the 2009 bonuses of your senior executives up for a shareholder vote.  You don’t have to wait for a law to overhaul your pay system so that folks are rewarded for long-term performance instead of short-term gains.

Those are actions CEOs and boards of directors could begin taking, and if they demonstrate responsibility maybe the powers in Washington will feel less need for severity in imposing all manner of new regulation. Maybe.

President Obama had all the rhetoric right today at Federal Hall. His speech, of course, was short on detail and long on generalities. He really was speaking to people outside the financial markets, those who deeply resent the bailouts and bonuses and (especially) both happening at the same banks. The symbolism of going to Wall Street to deliver the lecture was the main point today.

Whether the new rules that the financial markets eventually do get will actually improve things – or merely shift risks into different forms and sectors while stifling the flexibility (and discipline) of the free market – we will see in time.


Quote, unquote – Proxy EXcess

August 26, 2009

Discussion of the Securities and Exchange Commission‘s proposed new “proxy access” rule, aimed at giving activist shareholders an easier shot at electing members or slates to boards of directors, can get pretty arcane.

So I was glad to see, in today’s Wall Street Journal, a good primer on 14a-11 and a succinct and quotable quote that, to me, sums up the proposed change. Says lawyer John Finley of the New York firm Simpson Thacher & Bartlett:

It’s the biggest change relating to corporate governance ever proposed by the SEC. Period. It gives activists the ultimate vehicle to express dissatisfaction with a board, the ability to replace board members at the company’s expense.

Business lobbying against the change is ramping up toward the post-Labor Day push. That, of course, is when politicians return to Washington and harvest season begins for the crop of governmental mischief planted earlier in the year.

Maybe we could rename this particular proposal “Proxy Excess.”

Yes, the SEC is more active

July 20, 2009

If you think the Securities and Exchange Commission has been cranking out more enforcement actions since President Obama took office, you’re right, says a July 18 Harvard Law School Forum post by lawyers at Gibson, Dunn & Crutcher.

SEC InvestigationsThe numbers show a big increase in enforcement actions across various categories: new investigations opened (+23% in early 2009 vs. 2008), formal orders of investigation (+154%), temporary restraining orders (+183%) and injunctive actions (+46%). No huge surprise in the upturn: Administration officials have been rattling sabers and talking tough, and members of Congress have been calling for the heads of CEOs as some kind of retribution for the economic downturn. At the National Investor Relations Institute annual conference, as noted June 8 in this blog, NIRI President & CEO Jeff Morgan warned more SEC enforcement cases are coming.

The Gibson Dunn lawyers also mention some qualitative changes:

More telling than the statistics, in the last few months, the SEC has filed a number of high profile cases that demonstrate a more aggressive enforcement approach and that are consistent with the themes that [SEC’s new enforcement chief Robert] Khuzami has articulated. Not surprisingly, the SEC has focused its attention on cases related to the financial crisis. In addition, in an effort to bring cases more quickly, the SEC has also more frequently filed these cases in the absence of settlements and in the absence of parallel criminal cases. Moreover, presumably towards its goal of sending an “outsized message of deterrence,” the SEC has charged senior level individual executives.

Since I’m no lawyer, I won’t interpret SEC developments. You can read details in the Gibson Dunn post. As part of an investor relations team, of course, you should be discussing trends like these regularly with your company’s lawyers.

(Thanks to Dominic Jones @IRWebReport on Twitter for calling attention to the Gibson Dunn post on the Harvard Law site.)

Governance ‘fix’ may be broken

July 16, 2009

Corporate governance “reforms” taking shape in Washington, while aiming to fix the causes of the financial crisis, may in fact add to the problems.

In a memo to clients today, “Corporate Governance in Crisis Times,” the New York law firm Wachtell, Lipton, Rosen & Katz says governance failures of recent years stem from “pressure for short-term performance and quick stock market profits” (greed, you might call it).

But emerging schemes to fix governance, the lawyers note, focus on empowering investors – these might be mutual fund or hedge fund managers – to overrule company managements and boards of directors in matters of corporate policy and direction. Trouble is, at the risk of generalizing, asset managers are the ultimate short-termists. Desire for quick stock market profits is in their job descriptions.

Instead of “reform” like shareholder proxy access, creating a new right to call for sale of a company or dock the CEO’s pay, the lawyers suggest our policy makers should focus on society’s long-term good, including economic growth:

There is no reason to embrace a plethora of ill-conceived federal regulation and legislation that usurps the traditional role of state law and thereby overturn the fundamental legal doctrines that have formed the bedrock of history’s most successful economic system.  The engine of true economic growth will always be the informed business judgment of directors and managers, and not the hunger of short-term oriented shareholders for quick profits.

A long-term focus would mean encouraging boards and CEOs to pursue strategies for sustainable growth. Empowering boards of directors rather than arming union pension funds or special-situation hedge fund managers. Freeing rather than tying down managements. Designing incentives rather than Damoclean swords.

Lawmakers, regulators and courts need to remember that allowing companies to pursue long-term strategies (lawyers call it the “business judgment rule”) is the path both to shareholder wealth and societal benefits like job creation. Beware of making a fix, they warn, that may break more than it repairs:

Particularly at a time of depressed stock market valuations and the resulting danger of opportunistic attacks to bust up or takeover American companies, directors and managers must remain free to invest in the future and take the long-term view, so as to ensure prosperity for future generations.

These guys are lawyers for big corporations, of course. As a free-market sort, I’m inclined to agree that Washington doesn’t have the best ideas on what will restore business to a healthy growth trend. What’s your opinion?

More scary Washington stuff

June 10, 2009

Harvey Pitt, who was chairman of the Securities and Exchange Commission early in the Bush Administration, said Tuesday on a panel at the National Investor Relations Institute 2009 Annual Conference in South Florida:

Sarbanes Oxley was just the tip of the iceberg. We are federalizing the law of corporations. Companies that don’t get that are going to be left behind.

Pitt, now CEO of Kalorama Partners (a Washington-based consulting firm on business and government issues), said Congress and the SEC under the Obama Administration are dramatically changing the regulatory landscape for companies.

For example, shareholder proxy rights and board of director relationships to companies have traditionally been governed by state corporation laws but Congress now is likely to pass new laws on both, Pitt said. The “emotional and moral outrage” on extravagant compensation by companies getting federal aid also will lead to legislation – and it won’t be limited to bailout beneficiaries – he said.

Unfortunately, Congress when it legislates tends to wait for a thalidomide case – and we clearly qualify for that now [with the financial crisis] – and then tends to over-legislate.

Pitt’s advice: Public companies and boards should proactively address executive pay policy to bar large packages when companies are failing, “shareholder democracy” issues such as access to make proxy proposals, and other governance matters.

DC to IR: “Here we come”

June 8, 2009

NIRI09 advocacy panelPublic companies will face tougher laws and increasing regulatory scrutiny from Washington in the coming year, warns Jeff Morgan, president and CEO of the National Investor Relations Institute (NIRI).

In a panel on advocacy at the NIRI 2009 Annual Conference today, Morgan said the Securities and Exchange Commission (SEC) is pursuing three priorities for 2009:

  1. Enforcement of existing rules such as Regulation FD
  2. Investor protection & corporate governance
  3. Transparency of financial markets & products

“The landscape is changing and will continue to change … It’s a whole new world,” Morgan said. With the change agenda of the Obama Administration influencing all areas of regulation, companies should evaluate their IR practices with care – and join in advocating for balanced, sensible policies – he said.

From the SEC, Morgan said, we can expect to see enforcement cases in the next year centered on Regulation FD issues of selective vs. broad disclosure.

“We’ve been in an environment where we’ve never seen a lot of Reg FD cases come against companies,” Morgan said. The rapid growth of social media poses a challenge to traditional controls on corporate disclosures, he noted. “If we start to see [Reg FD enforcement actions], I think it’s going to cause all of us in a corporate environment to be asking how do we manage that better.”

Change is coming in the proxy area, too. Both the SEC “proxy access” proposal and elimination of broker voting for passive shares are likely to give more power to activist shareholders and pose challenges for companies, he said.

Morgan said the SEC also is looking at requiring enhanced disclosures on board of directors’ leadership approach, board nominations, compensation philosophy and practices, and perhaps nonfinancial factors such as climate-change impacts.

Transparency has been a theme for President Obama from the start. As the idea takes shape in legislation and new regulations, it may benefit IR people looking for more insight into hedge funds and less-regulated areas of the investment markets, but it will mean more demands on public companies, too, Morgan said.

“Corporate transparency is big on Congress’s agenda,” the NIRI president said.

So DC is saying to IR, “Here we come!” And I would add, “Watch out!”

Gag rule for bankers

April 10, 2009

Well, so much for transparency and all that. Now it seems the Federal Reserve is telling 19 of the nation’s largest banks not to disclose how they’ve done on the Obama administration’s vaunted “stress tests” (read AP story or Bloomberg).

With earnings season and conference calls upon us, bank CEOs and CFOs might face questions from investors: Does the government think you’re going to survive – or not? Does a rigorous look by regulators show the bank is healthy, or heading back to the Bailout Window?

Mum’s the word, the Fed decrees. Only the government is allowed to disclose the outcome of the stress tests – which it is supposed to do by the end of April.

As AP tells it, the Fed is protecting weak banks against panic if executives of the healthy institutions let the cat out of the bag:

The order was the latest in a series of government moves designed to keep good news about strong banks from dooming others to a downward spiral of falling share prices and financial weakness. If banks receiving the highest marks trumpet their results, the fear is investors might push down share prices of those companies that make no such announcements.

After Wells Fargo surprised investors with good earnings on Thursday, CFO Howard Atkins declined to talk about the government’s tests. “We haven’t commented on regulatory matters and we won’t start now,” Atkins said [to Bloomberg]. “We don’t comment on the process.”

The gag rule seems a little Orwellian coming from folks who champion “transparency.” For those of us brought up on efficient markets, open disclosure and so on, it’s an ethical imperative to tell investors about material information in a timely way.

But, then, if the government is going to control the big banks, the big banks are going to be – well, controlled by the government. Sssshhhhhh!

Get ready for new regulation

April 6, 2009

Wondering what new wave of regulation is coming our way? Chairman Mary Schapiro of the Securities and Exchange Commission today offered an outline in a speech to the Council of Institutional Investors.

Schapiro’s agenda for the SEC in 2009 includes proposals for new disclosure requirements, proxy and compensation changes, and other ideas that investor relations teams will want to watch closely.

The initiatives will focus on strengthening the hand of shareholders in electing boards of directors and holding them accountable:

  • In May, the SEC will consider a proxy access regulation to ensure that shareholders “have a meaningful opportunity to nominate directors.” Details to come, but one option was considered before. As MarketWatch reports: “A similar approach was introduced by ex-SEC Chairman William Donaldson in 2003, however it was never approved. Labor-backed investors and activist hedge funds have pushed for the authority; however corporations have opposed it arguing that investors with special interests such as labor unions would push their agenda at the expense of the company’s effort to improve share-value.”
  • The SEC will consider requiring more disclosure on board nominees – data on a candidate’s experience, qualifications and skills, beyond the current brief description of recent experience.
  • The Commission may require boards to disclose reasons for using a particular leadership structure — such as an independent chair, non-independent chair, or combined CEO and chairmanship.
  • Schapiro will seek more compensation disclosure, such as how executive pay drives management’s behavior, including risk-taking. She also wants companies to explain their overall comp approach, beyond highest-paid officers, and reveal consultants’ conflicts of interest.
  • In risk management, the chairman has asked the staff to develop a proposal “that looks to providing investors, and the market, with better insight into how each company and each board addresses these vital tasks.”

In addition, the SEC tomorrow will consider alternatives for limiting short selling – a thorn in the financial side for some companies and IR teams.

The devil is always in the details, and regulatory expansions can be especially devilish when they spring from political outcry. The media are describing the public’s current attitude, especially in Washington, as a “rage” brought on by bear-market investor losses and corporate scandals.

No doubt, securities lawyers will continue to have plenty of work ahead. IR practitioners should keep an eye on the SEC to prepare for what’s coming.

Monday, Monday …

March 30, 2009

I guess we learned a couple of things in Monday’s market:

  • Rallies don’t go on forever, especially amid negative business fundamentals (say, two of the Big Three teetering on the brink).
  • Attention CEOs: President Obama is an activist shareholder, and if you take the government’s money you should know who’s in charge.
  • Economic and industrial policy is unhinged from philosophical principles (this happened in the last administration), and global policy actions seem likely to continue in ad hoc reactive mode.

Those of us laboring in the investor relations trenches can continue to expect, shall we say, a fluid market environment. Stability and comfort aren’t in the macro picture  for the foreseeable future.

Regulation Redux – a risk for 2009

January 26, 2009

As Congress and the new President grapple with the economic crisis, one outcome seems certain: re-regulation of US businesses.

Regulation Redux is at hand, and investor relations people need to think about how to discuss changing regulatory risks with shareholders. No doubt, upcoming 10-Ks should address the surge in regulatory activism. CEOs should be prepared to speak plainly about the evolving environment.

With the economic cycle causing pain on a massive scale – what folks in Washington call “market failure” – politicians are in full fix-it mode. At his inauguration, President Obama voiced confidence in steering government and skepticism about leaving business to its own devices:

The question we ask today is not whether our government is too big or too small, but whether it works … Nor is the question before us whether the market is a force for good or ill. Its power to generate wealth and expand freedom is unmatched, but this crisis has reminded us that without a watchful eye, the market can spin out of control …

I think it’s fair to say the opposite of out of control is under control. The administration and Congress are looking at many sectors to bring under control. Some examples:

  • Banking. Many of America’s banks have a new shareholder in Uncle Sam. And just as Carl Icahn may have a few ideas for management when he buys into your company, it’s a cinch that Barney Franks, Tim Geithner and others are going to start writing new rules for banks. Attacking executive pay and cutting dividends to a cent is just the start.
  • Autos. Different bailout, same basic deal. Accepting the big bucks means making adjustments to satisfy the folks who sign the checks. Today’s announcement that Obama’s EPA may encourage stricter limits on greenhouse gases from cars and trucks points the way. My guess is the auto bailout will usher in policies that perpetuate the US industry’s uneconomical cost structure and subsidize politically correct cars.
  • Healthcare. Reform, a popular campaign promise in ’08, will be very expensive if it means universal coverage. Amid many fiscal demands, the low-hanging fruit of healthcare reform in ’09 may be regulations aimed at cutting costs to consumers. We might expect, say, tougher federal negotiation on drug prices and genericization of biotech drugs. Or maybe new rules to assure “fairness” in health insurance.
  • Securities markets. Amid the rush for bailouts, giant investment banks have accepted a tighter regulatory regime by converting to commercial banks. Next on the agenda is an effort to fix what many see as the SEC’s failure to prevent the meltdown of 401(k)s, implosion of Wall Street and notorious frauds exposed by the bear market. Even the Republicans last year proposed a major expansion of regulatory powers, revamping the SEC and perhaps the CFTC and Federal Reserve. A couple of likely regulatory targets: derivatives and hedge funds.
  • Labor. The Employee Free Choice Act, endorsed by Obama, would change the rules for achieving union representation. If the law is enacted, labor will be able to organize workers by soliciting signatures on cards rather than submitting to secret-ballot elections. The likelihood poses a risk to companies in healthcare, manufacturing, retailing and other services.
  • Energy and environment. Companies that are heavy energy users or impact the environment are accustomed to disclosure of risks on those issues. Legislative and regulatory changes will be on the watch list.
  • Taxes. A weak economy puts tax increases on the back burner and tax cuts, even for business, front and center. But there is tension between a desire for stimulus and an impulse to take away business “breaks.” Risks remain, amid soaring deficits, that efforts to capture more revenue may come at the expense of investors or unpopular industries.

Obviously, I’m no expert in policy challenges for specific industries. But I do know IR people need to talk to our companies’ experts about Washington and what may be coming our way.

Feel free to offer your own comments on regulatory risks and how we should discuss them with investors. (Comments can be anonymous.)

© Copyright 2009 Johnson Strategic Communications Inc.